An economic partnership deal between Japan and the European Union — over which leaders on both sides reached a broad agreement last week — should serve to emphasize the value of free and open trade at a time when it’s been challenged by the protectionist policies of U.S. President Donald Trump, who pulled the U.S. pulled out of the Trans-Pacific Partnership pact among 12 Pacific-rim economies. The Japan-EU agreement should add momentum for reviving the TPP pact among its remaining 11 members, including Japan.
An FTA is aimed to promote mutual trade by reducing or eliminating barriers to trade such as tariffs, benefit consumers on both sides by lowering import prices, and enhance the competitiveness of industries that stand to gain from greater exports and create more jobs. There will, of course, be sectors that face tougher competition with increased imports. The years set aside for phasing out the tariffs should be effectively used to turn those sectors — most often the agriculture in the case of FTAs involving Japan — resilient toward the onslaught of cheaper imports. Such efforts will be essential to show that free trade works, instead of wreaking havoc to domestic jobs as claimed by people like Trump.
The 12-nation TPP was to create a free trade area covering nearly 40 percent of the world’s gross domestic product. The Japan-EU partnership agreement, which both sides seek to seal by the end of the year and implement in the early part of 2019, will still cover nearly 30 percent of the world’s economy. Efforts must continue to resolve remaining issues before a final deal is reached, such as a mechanism to settle disputes between businesses and governments of their investment destination. The broad agreement should also help accelerate the efforts afoot to save the TPP among the 11 signatories other than the U.S. — Japan will host a meeting of chief negotiators of the 11 countries in Hakone, Kanagawa Prefecture, this week.
The Japan-EU free trade talks, launched in 2013, took on an additional significance after the Trump administration, with its “America First” agenda, pulled the U.S. out of the TPP and sought to renegotiate the 1994 North American Free Trade Agreement right upon its inauguration — in a major challenge to the global efforts on free trade architecture. Negotiations that led to the agreement declared by Prime Minister Shinzo Abe and EU leaders last Thursday focused on the tariffs on Japanese cars and vehicle parts shipped to Europe, as well as European cheese imports to Japan.
Once the deal is sealed, the 10 percent EU tariffs on Japanese passenger cars will be phased out in eight years. More than 90 percent of the 3-4 percent tariffs imposed on vehicle parts imports will be lifted immediately. Of Japan’s 4.1 million vehicle exports last year, only some 600,000 units are shipped to the EU market, where the 10-percent tariffs expose them to stiff competition with local rivals such as Volkswagen and Renault. Japanese automakers struggle with falling demand at home amid the declining and graying population, and have been seeking cuts to the tariffs to boost exports and keep up domestic production and jobs. Cuts to tariffs on vehicle parts will also shave the roughly ¥30 billion imposed on such imports by the carmakers’ plants in Europe.
The EU has meanwhile been pushing Japan to open up its cheese market, where consumption has been growing rapidly. Japan agreed to set a low-tariff import quota for EU-made cheese of 20,000 tons, to be expanded to 31,000 tons in the 16th year of the accord, with the tariffs to be phased out over the period. The quota is estimated to account for 25-40 percent of cheese imports from the region. Both sides have also agreed to immediately scrap import duties on wines. Such steps will cut the price of imported products to the benefit of Japanese consumers.
Government support will need to be provided to domestic sectors, likely including dairy farmers, that will face the tighter competition with imports. But the support should be provided not merely to ease their pain from the liberalization of their markets, but to reform the sectors so that they can compete with the imports. This is particularly important since the nation’s farming sectors — often viewed as threatened every time Japan concludes a free trade deal — are already reeling from structural problems of their own, including the rapid aging of farm producers. The pending free trade deal with the EU should be considered as yet another opportunity for the affected sectors to beef up their productivity and competitiveness with public support.